More rate cuts expected post-monetary policy review: Moody’s

New Delhi, Jan 22 (IANS) India’s central bank is expected to further cut the repo rate by 50 basis points after the monetary review, while the cash reserve ratio and the reverse repo rate are likely to be kept unchanged, economic intelligence provider Moody’s Economy.com predicted Thursday. “The Reserve Bank of India (RBI) is expected to loosen monetary policy when they next meet on January 27. However, following a series of aggressive interest rate cuts from October 2008, the central bank will likely take a relatively smaller step,” Sherman Chan, economist at Moody’s Economy.com said.

Under the current economic environment, Chan said, RBI is expected to set GDP growth and credit market stability as its main focus when reviewing monetary policy. Thus, according to her, the monetary easing cycle will continue through the first half of 2009.

However, the monetary easing cycle will not likely go beyond mid-2009, Chan said, adding: “In the latter half of the year, inflationary pressures are set to regain momentum in line with an expected rebound in global commodity prices. As major economies around the world may also begin to show signs of bottoming then, the RBI will likely sit tight during the second half and commence monetary tightening when growth is no longer a concern in 2010.”

She said the rapidly cooling inflation has given the RBI room to ease monetary policy, and that it needed to keep trimming interest rates to match the slowdown in price growth and prevent pushing up of interest rates.

Moody’s forecast a 50-basis point reduction in the repo rate, to 5 percent. According to her, the cash reserve ratio and the reverse repo rate are likely to be kept unchanged, as their current settings leave little room for further cuts.

“Moreover, the credit squeeze is mainly attributed to weak confidence rather than reserve requirements. The RBI will not likely cut the cash reserve ratio, which is at just 5 percent now, unless there is a strong reason,” Chan added.

India’s growth outlook has worsened in recent months with exports tumbling and industrial production growth continuing its downward trend. “There are no signs that the external environment will improve in coming months, which means that the Indian authorities must do all they can to sustain domestic demand,” she said.

Moody’s also said India is less vulnerable to external weakness compared with its neighbouring Asian economies, but is still hurt by the global downturn as there are flow-on effects from slowing exports and financial market chaos.